1. The Structure of Commodity Chains
Commodity chains reveal a lot about the global structure of production, the
global economy and thus represent a notable field of investigation that has
yet to be fully considered by transport geographers (see
commodity chains). Understanding the significance
of commodity chains requires a comprehensive approach since they include much
more than a simple transport consideration; a multitude of activities are involved.
Commodity chain analysis. The identification of the
actors and processes that contribute to the origination of a product that is
consumed by a market, such as raw materials, produces or consumption goods.
Thus, a commodity chain includes a sequence of operations ranging from the extraction
of raw materials, the assembly of intermediate goods, to the distribution to
consumption markets. Commodity chain analysis can also only consider only a
specific segment related to a single product (or group of products).
The analysis of such a complex chain of agents and processes considers several
perspectives:
- Transactional perspective: Identification of the flows and of the
transactions that create them. This particularly concerns the decision making
process in the establishment and management of commodity chains.
- Comparative perspective: Assess the relative competitiveness of
the elements of the commodity chains in terms of added value.
- Functional perspective: Identify the physical processes involved
in the circulation of goods, including the capacity constraints in distribution,
namely modal, intermodal and terminal effectiveness.
The analysis of commodity chains, depending on the perspective, can consider
several factors:
- Origin and destination. A basic issue of supply and demand which
reveals comparative advantages, locational preferences and market size. Intermediary
locations where activities such as warehousing need also to be considered.
- Cost function. Evaluates the costs incurred to the set of activities
taking place along the commodity chain such as procurement costs, manufacturing
costs, distribution costs and retailing costs.
- Load unit. Considers how the material flows in the commodity chain
are circulating, often related to how fragile, perishable (see the
Cold Chain) or valuable a product
is. It is more than simply an issue of containerization, but also in which
way the containerized load unit is used.
- Modal and intermodal use. A matter of the nature of the transport
chains used to accommodate the commodity chains in terms of modes, terminals
and freight forwarders.
- Regulation and ownership. The set of rules and regulations related
to the circulation of goods within the commodity chain, including compliance.
Also considers the nature and the level of control shipping companies have
over the commodity chains they use through agreements, mergers and alliances.
- Distribution channel. Relationships with logistical service providers,
particularly with manufacturers and retailers. In many cases, distribution
activities are subcontracted.
- Added value. The consideration of which parts of the commodity
chain contributes the most to added value. This is an important strategic
goal as added value is linked with profit margins. The organization of commodity
chain thus seeks to increase added value through locational and organizational
strategies.
2. The China Connection
China has become a crucial element in the emergence of global commodity chains.
After more than 20 years of export oriented industrialization, China has captured
a whole range of manufacturing activities, from the most simple and labor intensive
to those with a growing level of sophistication. The footwear commodity chain
is a notable example of a mature industry heavily dependent on low production
costs and efficient distribution channels. Products tend to be relatively simple
and success is commonly based on design, brand name and costs. It is thus a
manufacturing sector that has achieved a high level of fragmentation due to globalization.
From modest beginnings in the 1980s, footwear manufacturing has boomed in China,
which now accounts for about 50% the world's shoe production. A brief commodity
chain analysis reveals for this sector the following:
- Origin and destination. The Pearl River Delta has become one of
the most intensive manufacturing clusters in the world, the outcome of more
than two decades of foreign investments (from the mid 1980s), initially in
special economic zones like Shenzhen. Mainly due to poor inland transportation,
most of the manufacturing activities are clustered in the delta along main
road corridors and close to port facilities. The production is exported to
the rest of the world. In particular, 95% of the shoes sold in the United
States are manufactured in China, which in itself represents a significant
commodity chain. The nature of production commonly reveals a "platform"
structure where large fashion companies (American, European and Japanese)
controlling brand names are subcontracting their production. In many cases,
a
brand name designer is directly interacting with a retailer.
- Cost function. A
typical cost structure in shoe manufacturing reveals that because of the
low Chinese labor costs, labor became a marginal component of the production
costs. Transport costs are low because of a significant value (at retail)-to-volume
ratio. The most important costs are actually related to retailing and marketing,
underlining the level of maturity this industry has achieved.
-
Load unit. The typical factory output is a completed product including
the wrapping and packaging (often including the price tag), ready to be put
on a store shelf. Orders are placed on
pallets, which are then assembled in
container loads. A growing trend to maximize the usage of the container
unit is to forego the usage of pallets at the expense of additional loading
and unloading costs. The products are put on pallets close to their destination.
The load units are containerized but the assembly can include a variety of
goods bound for the same distribution center, particularly if the retailer
is diversified. At the distribution center, these loads will be broken down,
often in LTL bound to specific retailing stores.
- Modal and intermodal use. Since the export market is global, the
commodity chain involves a variety of modes. The first step is commonly truck
deliveries at a distribution center where loads are assembled in containers.
Those containers are then
delivered to a port facility. Since the shoe commodity chain is globally
oriented with a multitude of markets being serviced by a fairly centralized
production structure, a set of complex activities are performed at the port.
A particular problem is linked with containerized trade imbalances and the
loading of containerships considering that each services different markets and has a set of port calls. In 2004, about 160,000 TEUs of containers
carrying shoes were imported in the United States through west coast ports.
Then, the
inland freight distribution system carries these containers to their destinations.
- Regulation and ownership. This commodity chain takes place in a
context where the global apparel industry operates in a free trade environment.
Since shoes are simple and labor intensive products, few countries maintain
duties for this type of product, which can circulate with relative ease from
a regulatory perspective. The ownership of global commodity chains is increasingly
concentrated since many international logistics providers have
vested interests in physical distribution activities, notably in distribution
centers.
- Distribution channel. In the case of shoe manufacturing in China,
like many manufacturing activities, locational issues are simple as manufacturers
choose sites close to port facilities. The challenge resides in the distribution
of shoe production to a multitude of customers in a multitude of countries.
Many logistics and distribution firms (3PL) have started offering comprehensive
freight services in China, particularly around its export oriented zones.
There is thus a setting of more efficient distribution channels within China,
which helps cope with the surge of exports.
- Added value. It is typical in this commodity chain that the designer
and the retailer capture the great majority of the added value (25% and 50%
respectively).
The sequence provided here has focused more specifically on the transportation
and distribution aspects of the commodity chain. It reveals a globalized and
fragmented industry seeking to extract as much added value as possible from
a mature product being the object of intense competition for its production
and retailing.
Copyright © 1998-2008, Dr. Jean-Paul Rodrigue, Dept. of Economics & Geography,
Hofstra University. For personal or classroom use ONLY. This material (including
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